You made a strong point that the Windows OS is becoming irrelevant, so I sought to quantify impact of worst case scenario – what happens if the Windows Division, which is 50%+ of MSFT’s EBIT, goes away and make NOTHING tmw?
Doing a sum of the parts analysis and assigned value only to Server & Tools , and MS Business division, EBIT multiples of 12x for both these business (I used EBIT multiple just b/c it happened to be right in front of me but you can use EBITDA multiples as well). I believe 12x EBIT multiple is appropriate for those divisions as they are highly profitable, growing, and similar businesses such as SAP, Adobe, Intuit are all trading higher .
Doing the above, and assigne 0 value to MS windows, Online service , and Entertainment divisions.. you would get ~$24/share! Adding in a very modest valuation of 6x EV/EBIT for Windows division, and you’re easily over $30/share..
Bottom line, you raised some very valid points about the problems MSFT are facing, but those are all more than priced in at the current valuation. Do I think there’s a catalyst to realized all those value? No, not unless MSFT spins off Windows OS tomorrow. But what I’m saying is there is very little downside at this price, and the upside value is huge if you wait for it to unlock.
Your statement that Windows division drive everything is debatable. MS Office & MS Server are strong franchises in themselves and dont need Windows OS to drive them. I've been using a mac for years (hated Vista), but still can't do without MS office. In fact, its more like MS office supporting Windows sales. People are buying macbooks, then end up buying parallel/fusion, install windows JUST so they can run windows version of MS excel. If you dont believe me, just ask any serious business users (accountants, bankers..etc) if they can do without MS office...
Bottom line: while your points about Windows OS is very valid, the MS office & Server divisions dont need Windows OS to do well. and just those 2 divisions alone already justify the current valuation.
Hartford Financial Will Do Fine Without John Paulson's Advice [View article]
Thanks Tom, I agree with you that a separation is not without risk and certainly the management has a valid point about having to put most of the debt on P&C sub and risk equity dilution. I saw the GS report that Paulson kept referencing...it assumes that 80% of debt goes to the life sub - they could be playing with fire there if the life subs doesnt start generating cash flow fast.
In general, what do you think of the operation synergy between P&C & life insurance operation? Whether its HIG, AIG, or GNW...I'm not sure there is any.. although I understand from the financial point of view it helps to have diversified sources of cash flow.
Prudential Financial: Market Reaction To Earnings Is Overdone [View article]
what I meant was the co-investment in real estate fund they manage (see paragraph from transcript below). its hard to grasp how material this is but just want to make sure we're not missing some other material issues..
While most of the segment's earnings come from asset management fees, the decline in earnings in relation to the year-ago quarter was mainly driven by a decrease of about $35 million in the contribution from ITSICOM [ph]. As Rich mentioned, results from incentive, transaction, strategic investing in commercial mortgage activities, which fluctuate and are partly driven by changing valuations and the timing of transactions. The current quarter reflects declines in the value of several investments, mainly co-investments and real estate funds we manage, while results for the year-ago quarter benefited from gains of about $15 million from sales of foreclosed properties. Lower contribution from ITSICOM [ph] activities, together with higher expenses in the current quarter, more than offset the benefit of higher asset management fees in the quarter, driven by growth in assets under management.
Prudential Financial: Market Reaction To Earnings Is Overdone [View article]
thanks Tom. How much of the price reaction did you think was driven by retail investors not understanding the Japan hedges? (I didnt think that was going to be an issue as management explained it pretty well during the call).
I would've thought the professional community would be more of a driver, and they certainly look past the accounting... Do you think its other issues, such as the prop trading losses that was driving the price ?
Business Development Companies Raising Debt In The Public Market [View article]
Thanks, this is by far the most insightful article on BDCs that I read in a while.
"we are much more positive about the structure and outlook for the Ares Capital and Gladstone company investments than what we've read about the Triangle Capital, Horizon and Medley Capital deals."
Could you elaborate a little more on why you're less positive on Medley Capital? From what I seen, both the revolver and the bonds are issued by the same entity, so there's no structural subordination issue on this one (granted that the bonds are still unsecured vs secured revolver)
Hartford Financial Will Do Fine Without John Paulson's Advice [View article]
Tom,
Seems to me that your article actually supports Paulson's call for action. Your SOTP analysis demonstrated that the values are there, and the market just need to recognize it. What better than a spin off/breakup to highlight those values?
Sure, we can wait, and maybe the market will realize HIG's value in 2013 when the life sub can upstream dividend to holdco. But my point is this -- if given a choice between getting the gain now vs later, why would you prefer later?
"Short term focus" doesn't have a nice ring to it, but how is long term focus better in this case? In a breakup scenario, you can still get long term upside by owning both the P&C and life insurance companies.
given your level of conviction, i presume you're putting your money where your mouth is? how are you implementing this trade - shorting or buying puts? if buying puts, at what strike & expiration? if shorting, what is your target price and time horizon?
Microsoft's Blind Bulls [View article]
You made a strong point that the Windows OS is becoming irrelevant, so I sought to quantify impact of worst case scenario – what happens if the Windows Division, which is 50%+ of MSFT’s EBIT, goes away and make NOTHING tmw?
Doing a sum of the parts analysis and assigned value only to Server & Tools , and MS Business division, EBIT multiples of 12x for both these business (I used EBIT multiple just b/c it happened to be right in front of me but you can use EBITDA multiples as well). I believe 12x EBIT multiple is appropriate for those divisions as they are highly profitable, growing, and similar businesses such as SAP, Adobe, Intuit are all trading higher .
Doing the above, and assigne 0 value to MS windows, Online service , and Entertainment divisions.. you would get ~$24/share! Adding in a very modest valuation of 6x EV/EBIT for Windows division, and you’re easily over $30/share..
Bottom line, you raised some very valid points about the problems MSFT are facing, but those are all more than priced in at the current valuation. Do I think there’s a catalyst to realized all those value? No, not unless MSFT spins off Windows OS tomorrow. But what I’m saying is there is very little downside at this price, and the upside value is huge if you wait for it to unlock.
Microsoft's Blind Bulls [View article]
Bottom line: while your points about Windows OS is very valid, the MS office & Server divisions dont need Windows OS to do well. and just those 2 divisions alone already justify the current valuation.
Hartford Financial Will Do Fine Without John Paulson's Advice [View article]
In general, what do you think of the operation synergy between P&C & life insurance operation? Whether its HIG, AIG, or GNW...I'm not sure there is any.. although I understand from the financial point of view it helps to have diversified sources of cash flow.
Why PIMCO's Junk-Bond ETF Is The Best Of Its Kind [View article]
Prudential Financial: Market Reaction To Earnings Is Overdone [View article]
While most of the segment's earnings come from asset management fees, the decline in earnings in relation to the year-ago quarter was mainly driven by a decrease of about $35 million in the contribution from ITSICOM [ph]. As Rich mentioned, results from incentive, transaction, strategic investing in commercial mortgage activities, which fluctuate and are partly driven by changing valuations and the timing of transactions. The current quarter reflects declines in the value of several investments, mainly co-investments and real estate funds we manage, while results for the year-ago quarter benefited from gains of about $15 million from sales of foreclosed properties. Lower contribution from ITSICOM [ph] activities, together with higher expenses in the current quarter, more than offset the benefit of higher asset management fees in the quarter, driven by growth in assets under management.
Prudential Financial: Market Reaction To Earnings Is Overdone [View article]
I would've thought the professional community would be more of a driver, and they certainly look past the accounting... Do you think its other issues, such as the prop trading losses that was driving the price ?
btw SIFI is pronounced "siffy"
Business Development Companies Raising Debt In The Public Market [View article]
"we are much more positive about the structure and outlook for the Ares Capital and Gladstone company investments than what we've read about the Triangle Capital, Horizon and Medley Capital deals."
Could you elaborate a little more on why you're less positive on Medley Capital? From what I seen, both the revolver and the bonds are issued by the same entity, so there's no structural subordination issue on this one (granted that the bonds are still unsecured vs secured revolver)
Hartford Financial Will Do Fine Without John Paulson's Advice [View article]
Seems to me that your article actually supports Paulson's call for action. Your SOTP analysis demonstrated that the values are there, and the market just need to recognize it. What better than a spin off/breakup to highlight those values?
Sure, we can wait, and maybe the market will realize HIG's value in 2013 when the life sub can upstream dividend to holdco. But my point is this -- if given a choice between getting the gain now vs later, why would you prefer later?
"Short term focus" doesn't have a nice ring to it, but how is long term focus better in this case? In a breakup scenario, you can still get long term upside by owning both the P&C and life insurance companies.
Microsoft's Blind Bulls [View article]
given your level of conviction, i presume you're putting your money where your mouth is? how are you implementing this trade - shorting or buying puts? if buying puts, at what strike & expiration? if shorting, what is your target price and time horizon?